Document Type
Dissertation
Date of Award
1976
Keywords
Money supply, Germany (West), Monetary policy
Degree Name
Doctor of Philosophy (PhD)
Department
Economics
First Advisor
Stanley H. Cohn
Second Advisor
Paul F. McGouldrick
Third Advisor
Robert M. Lovejoy
Abstract
Following the apparent “failure” of monetary policy to restrain growth during the 1928-29 period of excessive economic activity, and the ineffective attempts to revive the U.S. economy through the allegedly expansionary monetary measures in the early 1930s, there occurred a radical shift of preference toward fiscal policy as the most effective countercyclical vehicle. The important theoretical work of J. M. Keynes, and the successful implementation of various public works expenditure programs which created jobs and expanded income levels tended to reinforce the position among U.S. economists that changes in taxes and government spending were the most important means by which economic growth might be assured. However, the U.S. post-war economic experience following the Treasury-Federal Reserve “accord” of 1951 has gradually induced an extensive revival of interest in monetary policy as a viable instrument for influencing aggregate economic activity. Recent evidence indicates that there are significant reasons for questioning the effectiveness of fiscal policy in the context of the generally high employment economic environment which has obtained in the U.S. system during the period 1950-1971.
There have been two fundamental economic goals which have emerged as the most pervasive and difficult ones confronting U.S. policymakers since 1950. These issues have involved the sustained maintenance of an “adequate” rate of economic growth, and the avoidance of severe inflationary trends which frequently lead to disruptions of activity in various important sectors of the economy. The decade of the 1950s in the U.S. was characterized by largely inadequate rates of economic growth, several periods of exceptionally high levels of unemployment, and a generally low rate of increase in the overall price level. In contrast, the period 1961-66 exhibited a sustained expansion in Gross National Product, steadily declining unemployment, and an annual inflation rate which averaged only 1-2 percent. However, the period 1966-1971 was dominated by then unprecedented inflation rates of 4-6 percent per annum, a simultaneous slowdown in the rate of real economic growth, and a near return to the high rates of unemployment which prevailed during the previous decade. Historically large rates of price increases tended to persist within the U.S. economy despite the implementation of traditional restrictive fiscal measures which were principally designed to temporarily reduce the rate of economic growth, increase unemployment, and thereby diminish inflationary pressures.
Even the most casual analysis of the U.S. post-war economic experience reveals that the policymakers were generally unable to maintain adequate rates of economic growth, and that upon the attainment of full employment in the mid-1960s, an inflationary trend quickly developed which has proven to be largely unresponsive to traditional deflationary fiscal measures. Although it may be argued that those fiscal deflationary measures which were taken were not nearly strong enough, this commentary provides an indication of the degree of unresponsiveness of fiscal policy.
Several cases in which U.S. fiscal and monetary policies were operating in opposite directions appear to provide ample reasons for questioning the allegedly dominant influences of fiscal policy upon aggregate economic activity. Using the rate of growth of actual U.S. government expenditures plus transfer payments to represent the major thrust of fiscal policy, while employing the rate of change in the narrowly defined seasonally adjusted money supply to depict U.S. monetary policy actions, Keran found that “of the twelve cyclical movements in economic activity from 1919 to 1969, eleven are preceded by corresponding movements in the money stock" (14). Most noteworthy during the post-war era are the cases of 1948-50 and 1966-67 where in both instances the monetary impulse was strongly expansionary, and the fiscal thrust was shown to be broadly restrictive. Although the full employment surplus or deficit might be a more representative indicator of the fiscal impulse, in each of the above periods the short-run effect upon the rate of growth of economic activity was in the same direction as monetary policy. “Economic Activity” was therein measured by the scaled product of the Consumer Price Index multiplied by Gross National Product in the base years of 1957-59.
Another important aspect of the U.S. monetarist position is demonstrated by the secular relationship which apparently exists between the rate of growth of the money stock and the rate of U.S. inflation as measured by the G.N.P. deflator. During the period 1952-62, the seasonally adjusted average annual rate of growth of the U.S. money stock was 1.7 percent; for the period 1962-66, the growth rate accelerated to 3.7 percent; and during the period 1966-71, the rate of growth of money expanded to a trend rate of 6.1 percent. During the years 1952-65, the U.S. general price index expanded at an annual trend rate of 1.8 percent; for the period 1965-68, this rate increased to 3.9 percent; and from 1969 to the second quarter of 1971, prices expanded at a trend rate of 5.4 percent. These data broadly suggest two potentially important conclusions. First, the long-run rate of growth of the money stock may exert an important influence, after a short time lag, upon the U.S. rate of inflation; and secondly, that a severe expansion of prices may persist despite substantive deflationary fiscal actions, if the rate of increase in the money supply is not concomitantly decreased.
In view of the brief yet representative sample of findings which has been cited above, and the increased dissatisfaction regarding the effects of fiscal policies during the late 1960s, increased attention began to be focused upon monetary policy as a potentially more viable vehicle for influencing economic activity and controlling inflation. In a practical sense, this rekindling of interest in monetary policy probably could not have gained momentum so quickly if it had not been for the substantial body of theoretical and empirical research which was pioneered by Milton Friedman. Since the mid-1960s, however, the number of articles appearing in the professional journals, in addition to those which have been offered in the Federal Reserve Bank of St. Louis Review (hereinafter referred to simply as “Review”), have exhibited a momentous rate of increase. This dramatic shift in policy perspective has been engendered in part by the apparent inability of fiscal policy alone to reduce the inflationary spiral without moving the U.S. economic system to the brink of depression. In the following discussion, I shall briefly present some significant principles of the U.S. “monetarist revolution” for the specific purpose of relating these developments to those policy dilemmas which exist within the West German economy.
It should be initially acknowledged that the debate concerning the validity and methodology of the new monetarist views is one of the most controversial and complex series of discussions which appears within the literature. Although the current U.S. monetarist position has received increased attention and limited acceptance by some members of the Economics profession, it can hardly be maintained that this complex set of policy alternatives has been wholeheartedly advocated by most U.S. policymakers, or even by the U.S. Federal Reserve. Indeed, the high rate of expansion of the U.S. money supply during the late 1960s and early 1970s clearly illustrates that the Fed had not embraced at that time any monetarist anti-inflationary policy stance. Since this dissertation is designed to provide a practical framework for applying some basic tenets of the U.S. case to the West German economy, it shall not be possible to engage in an extensive discussion concerning the relative merits of the fiscalist versus monetarist debate. Therefore, it shall be tentatively assumed that the theoretical and empirical bases for the U.S. monetarist case have been sufficiently substantiated to at least merit serious consideration for application to the U.S. system, and to various developed economies throughout the world.
Recommended Citation
Jeanneret, John P., "An analytical approach to the West German money supply process" (1976). Graduate Dissertations and Theses. 326.
https://orb.binghamton.edu/dissertation_and_theses/326